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Evaluation of the European Commission E-Commerce Sector Inquiry with regard to Consumer Goods

June 15, 2017

Introduction

The European Commission's ("EU Commission") e-commerce sector inquiry that started on May 6, 2015 is finalized, and the final report ("E-commerce Report") is published1. The EU e-commerce market, which has been systematically grown in the past few years, is one of the largest markets in the world. The percentage of people who shop online was 30% in 2007, and it increased to 55% in 20162. The E-Commerce Report enabled the EU Commission to analyze all the dynamics, competitive concerns and market practices in the e-commerce market. Thus, in the context of the resolutions of the E-Commerce Report, in the long term, various changes may be observed within the European Union competition law.

For the purposes of the e-commerce sector inquiry, the EU Commission addressed information requests to more than 1700 undertakings that carry on business in the e-commerce market, and opinion requests to 28 member states. Also, the EU Commission evaluated 9.000 contracts within the frame of the sector inquiry. The fact that the EU Commission gathered information from such a large group indicates that the EU Commission has studied the market from various aspects.

The E-Commerce Report has two main sections. The first chapter is with regard to consumption goods, and the second section is with regard to the e-commerce subjects related to digital content. This article will evaluate the section on consumer goods.

Main Conclusions of the E-Commerce Report

Within the context of the sector inquiry, the EU Commission emphasizes the remarkable development experienced in the e-commerce sector in the last ten years. The EU Commission states that this development had significant effects on the undertakings' strategies on their distribution channels and consumer behaviors. The EU Commission's main findings are as follows:

* Price transparency in the market has increased with e-commerce. The EU Commission points out that consumers are now able to make online price comparisons, and may switch from one channel to another. However, it is determined that it also creates a free-riding problem between retailers in traditional distribution channels and sellers on e-commerce channels.

* Opportunity to make online price comparison increases the price competition. The ability to make price comparisons results in an increased price competition that affects both online and offline sales.

* The increased price transparency allows undertakings to monitor their prices. The EU Commission states that a majority of the undertakings track their own products and competitors' product prices by way of computer programs. This allows them to easily detect the possible deviations from recommended prices. According to the EU Commission, the availability of real-time online pricing information may also trigger price coordination. The EU Commission states that under certain conditions, these programs may raise competitive concerns.

* The existence of the alternative online distribution channels results in undertakings to access customers easily. Through online platforms, retailers that have limited investment opportunities can sell their products to customers in various member states. The EU Commission, however, states that this may give rise to problems with regard to the distribution and brand strategies of manufacturers.

Within the context of the E-Commerce Report, the EU Commission monitors the market trends and observes the market. One of the observations is that with the growth of e-commerce, manufacturers have started to sell their products directly through their own online sales channels. In this way, manufacturers compete with their own retailers. Another observation is related to the expansion of selective distribution systems: manufacturers endeavor to better control their distribution networks. Manufacturers aim to have not only more control over their retailers' distribution qualities, but also their prices. This fact is confirmed by the increase in the usage of selective distribution systems experienced in the last ten years.

Main Competitive Concerns

Selective Distribution Systems

The EU Commission states that pursuant to vertical block exemption regulations, qualitative and quantitative selective distribution systems are applied under certain conditions, and are not considered as hardcore restrictions. The EU Commission does not consider that an amendment is necessary on this issue. However, the EU Commission highlights one point: some manufacturers limit retailers who wish to conduct solely online sales, and oblige sellers to engage in traditional distributorship, as well as online sales. The EU Commission points out that the condition of traditional distribution does not aim to create an increase in the distribution service and, to the contrary, it seeks to exclude those sellers who wish to conduct only online sales. For this reason, the obligations related to the condition of engaging in traditional distribution shall be analyzed more closely in situations where the conditions' connection with the quality of distributorship or other activities cannot be determined.

Restrictions as to Online Selling and Online Advertising

Within this context, the most implemented restriction is the price restriction at 42%. After reiterating the prohibition of resale price maintenance, the EU Commission mentions its concerns on this subject. It states that both manufacturers and retailers monitor online prices through various computer programs, thereby easily identifying the deviations from the recommended prices. Furthermore, this price transparency will ease any price collusions in the market.

The EU Commission scrutinized the restrictions particularly related to online platforms. It addresses that manufacturers' restrictions of online sales give rise to competitive concerns. Although the EU Commission has determined that the majority of the retailers (90%) use their own online stores, it is has also confirmed that the importance of the online platforms will gradually increase. According to the EU Commission, the online platforms are more important for small and medium-sized retailers than for large retailers.

18% of retailers state that the agreements with their suppliers contain online platform restrictions. These restrictions are generally with regard to selective distribution systems.

The EU Commission has refrained from making any observations with regard to one of the most important conclusions of the E-Commerce Report - online platform restrictions implemented in the selective distribution systems. The EU Commission states that the restrictions related to online platforms should not be automatically considered to be hard and fast restrictions. Instead, the EU Commission suggests a case by case analysis within the context of the market conditions.

Furthermore, in the E-Commerce Report, the EU Commission addresses geographic restrictions, which are called "geo blocking." 11% of retailers reported that they have cross-border sale restrictions on at least one product that they sell. The EU Commission states that these kinds of restrictions may raise to various competitive concerns.

The last point is related to "big data" that is used in e-commerce. The EU Commission determined that the "big data," which is comprised of the collection and the processing of large amounts of data, is becoming increasingly important for e-commerce. It is stated that the data obtained by undertakings is a valuable asset, and it can enable the undertakings to provide better products and services. On the other hand, the EU Commission also states that aside from these efficiencies, data-collection in large amounts, especially the collection of competitively sensitive data, may cause some competitive concerns. Particularly, the exchange of this data between online sale platforms and online retailers acting in the same market is considered to be precarious.

Conclusion

The E-commerce Report indicates that the EU Commission's approach with regard to vertical agreements will not change in general terms. This is the most important inference from the E-Commerce Report. Although several vertical restrictions related to the e-commerce market are discussed within the scope of the E-Commerce Report, the EU Commission does not consider an essential change in the vertical block exemption system.

The EU Commission aims to apply the EU competition rules to the greatest extent possible in the field of e-commerce and, in line with this objective, indicates that better contact should be maintained with the competition authorities of the member states within the context of e-commerce.

The E-Commerce Report addressed issues to be discussed in many aspects in the long term. Computer programs making online price comparisons, online platforms, and the possibility of conditioning geographical restrictions are the points that need to be discussed in due course.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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